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China’s Stock Index Rises on Manufacturing Data; Yanzhou Drops

China’s benchmark stock index rose as a report showing China’s manufacturing may contract at a more moderate pace in October overshadowed concern the earnings outlook for resource companies is worsening.

Huaneng Power International Inc. led a gauge of utility stocks in the CSI 300 Index to the biggest gain among 10 industry groups after BNP Paribas SA said profit growth will accelerate on weaker coal prices. China Eastern Airlines Corp. rallied 2.4 percent after UOB-Kay Hian Holdings Ltd. said the nation’s carriers will report “stellar” earnings on lower fuel prices. Yanzhou Coal Mining Co. dropped 1.6 percent after Barclays Plc downgraded the stock and UOB-Kay Hian said China’s coal industry may post “poor” earnings in the third quarter.

“China’s economy is recovering but at a very slow pace and there’s no sign of a big pick-up in growth,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which manages about $120 million. “The index may trade in a narrow range.”

The Shanghai Composite Index added 0.1 percent to 2,115.99 at the close, even as 463 stocks declined and 459 gained. The CSI 300 fell 0.2 percent to 2,307.78. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong slid 0.7 percent today. Hong Kong’s market was shut yesterday for a holiday. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, fell 1.3 percent in New York yesterday.

The Shanghai Composite had rebounded 5.6 percent since reaching a three-year low on Sept. 26 on expectations regulators will introduce measures to stabilize the market ahead of a once-in-a-decade power transition of the Communist Party. The Shanghai gauge is still down 3.8 percent this year and trades at 10 times estimated earnings for this year, compared with the 17.8 average since Bloomberg began compiling the weekly data in 2006.

Manufacturing Report

The preliminary reading was 49.1 for a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics. It compares with a final level of 47.9 for September. A reading above 50 indicates expansion.

The manufacturing survey may bolster prospects that China’s expansion will rebound from a three-year low after official data showed exports, production and investment accelerated last month. That would reduce the urgency for leaders to roll out more pro-growth policies ahead of a Communist Party congress set to begin Nov. 8, part of a once-a-decade power handover.

The world’s second-largest economy is bottoming out and growth will probably accelerate during the next few quarters, Morgan Stanley strategists including Hong Kong-based Jonathan Garner wrote in a report today. The rebound will probably surprise investors who have become “increasingly cautious” on China, they wrote.

Utility Stocks

Chinese stocks traded on the mainland are among the top investments to profit from an economic recovery, they said.

Yuan-denominated A shares that are traded in mainland China lagged behind their equivalent securities in Hong Kong for a record 10 straight days through yesterday and traded at the biggest discount since June 2011, according to an index compiled by Hang Seng Bank Ltd.

A gauge of utility stocks in the CSI 300 rose 1.6 percent, the most among industry groups. Huaneng Power jumped 4.8 percent to 6.28 yuan after it reported net income surging 757 percent in the third quarter from a year earlier. Datang International Power Generation Co. added 2.5 percent to 4.44 yuan.

BNP Paribas forecast faster earnings growth in the fourth quarter for power producers on a power generation recovery and weakening spot coal prices. Huaneng is a top pick among independent power producers, BNP said in a report to clients.

The nation’s carriers will report “stellar” earnings in the third quarter, UOB-Kay Hian said in a report to clients.

Earnings Outlook

China Eastern, the nation’s second-biggest domestic carrier, advanced 2.4 percent to 3.40 yuan. China Southern Airlines Co., the largest domestic carrier, rose 1.2 percent to 3.52 yuan. Air China Ltd., which scrapped a planned share sale this week, rebounded 1.6 percent to 5 yuan.

China Eastern is poised to report a 332 percent jump in third-quarter profit from the previous quarter, while China Southern will show a 2,400 percent surge in profit as airlines benefited from a 1.1 percent increase in the value of the yuan during the period and a 10 percent drop in fuel prices, they wrote.

Fourth-quarter earnings for non-financial companies may grow 9.9 percent, compared with an 11 percent drop in the third quarter, according to Chen Li, head of China equity research at UBS AG. China’s stocks may rebound in the fourth quarter as the slowdown in earnings growth halts and liquidity supports valuations, he said, recommending cement producers, heavy machinery companies and retailers.

Resource Stocks

Yanzhou Coal, the fourth-biggest producer, declined 1.6 percent to 18.38 yuan. China’s coal industry may show “poor” results for the third quarter and Yanzhou’s profit is estimated to fall 32 percent from the previous three months, Helen Lau, an analyst at UOB-Kay Hian, wrote in note. China Coal Energy Co. reported a 22 percent drop in quarterly net profit yesterday.

Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co., the rare earth producer that reported a 90 percent slump in third-quarter profit, retreated 3 percent to 31.46 yuan after it shut some of its production.

Thirty-day volatility in the Shanghai Composite was at 19.8 today, compared with this year’s average of 17.2. About 7.3 billion shares changed hands in the gauge, 5.2 percent lower than the daily average in 2012.

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